Establishing who will receive your assets in the event of your death or incapacitation is the process of estate planning. A thoughtful estate plan, which is frequently created with legal advice, can guarantee that your assets are distributed to your heirs and beneficiaries in a way that controls and reduces estate taxes, gift taxes, and other tax implications.
- 1 How to Create an Estate Plan to Prepare for the Future
- 2 Who Should Participate In Your Estate Plan Review?
- 3 What function does your company have in your estate plan?
- 4 Are Your Digital Accounts and Files Accessible to Others Besides You?
- 5 Why Should You Consider Charity Trusts Right Away?
- 6 Why Should You Take Into Account a GRAT?
- 7 How Can a Lifetime Exemption Be Used for a Lower Valuation?
- 8 What Steps Should You Take Following Your Estate Plan?
- 9 7 Steps To Plan Your Estate Future
How to Create an Estate Plan to Prepare for the Future
Even though no one enjoys estate planning, it’s crucial to keep your plan current for the sake of your family. Some of the key details I prefer to go through with clients during the estate planning process are included in this article.
Who Should Participate In Your Estate Plan Review?
You can begin the procedure by consulting one of your reliable advisors. Although you’ll need to see an attorney along the process to produce documentation, your CPA can still be of assistance. Your CPA should be able to recommend an estate planning lawyer if you don’t already know one.
What function does your company have in your estate plan?
Your business will be revalued in your estate if you own one. You can specify how you want your business to be handled when you pass away using an estate plan. Do you intend to market it? If you give it to one kid, why not the other? Your estate plan can provide more details.
Are Your Digital Accounts and Files Accessible to Others Besides You?
Making ensuring someone other than you has access to your digital accounts and files is more crucial than ever.
Frequently, one person in the family is in charge of all financial records, paperwork, and online accounts. Your loved ones may struggle greatly to access items like bank accounts, investment accounts, and retirement plans if something awful occurs to you and you are the only one who has the passwords.
I advise all of my clients to store their passwords in a single, secure location by using a digital vault like LastPass. Make sure the people you care about know how to access your online safe.
The Technology Solutions Group provides advice on how to create strong passwords. Whatever you do, don’t name your password spreadsheet passwords.xls!
Why Should You Consider Charity Trusts Right Away?
Trusts created for general income tax or estate planning purposes are known as charitable trusts.
When someone sells low-basis stock with a significant gain, charitable remainder trusts are frequently created. They assist you in avoiding immediate gains tax.
For instance, if you purchased early shares of Facebook or Amazon, their value has increased dramatically. You can create a charitable remainder trust that defers the capital gains tax when you leave part of the shares to charity and receive a tax deduction rather than selling the stock in one big chunk and paying the gains tax all at once. More crucially, you can donate the remaining value to charity while keeping the majority of the value for yourself as a long-term income stream with low capital gains taxes.
There are additional approaches you can use to include charitable giving in your financial planning. Giving to a foundation, as an illustration, can be a useful income tax planning technique. Creating a foundation may enable you to reduce your income taxes.
Why Should You Take Into Account a GRAT?
For those who currently use a number of estate planning techniques, a grantor retained annuity trust, or GRAT, is a tool for estate planning. With a GRAT, a person can give their children or other designated beneficiaries the appreciation on assets that are appreciating while minimizing or completely avoiding gift taxes.
The way a GRAT works is as follows: if you have an item that is anticipated to increase in value, you can use a GRAT to maintain its current worth as well as the low IRS interest rates we are now experiencing, then donate it. If the asset increases in value, the increase will not be subject to estate taxes.
Moving assets with a low value, like stocks, to the next generation is a great idea if you will be paying a high estate tax in the future.
How Can a Lifetime Exemption Be Used for a Lower Valuation?
There is currently a $11 million estate tax exemption available to everyone. You might have $10 million in shares that you can donate, depending on the other assets in your estate. Giving the stock away is a smart move because it will keep any future appreciation out of your estate, but you also have the chance to negotiate a lower asset valuation.
You can limit assets and maintain control of them by including additional entities like a family limited partnership (FLP) or family limited liability corporation (FLLC). You are allowed to lower the gift’s value because the recipient has no control over it.
A family limited liability may allow you to donate a stock and bond portfolio while still receiving 20 to 30% of the value donated to your family.
What Steps Should You Take Following Your Estate Plan?
- Prepare your estate plan. An existing plan should be updated. Make sure you have legal documents in place, such as wills, powers of attorney, and medical directives.
- In case of an emergency, let your loved ones know how to access your online accounts and files.
7 Steps To Plan Your Estate Future
- Create an inventory
- Account for your family’s needs.
- Establish your directives.
- Review your beneficiaries.
- Note your state’s estate tax laws.
- Weigh the value of professional help.
- Plan to reassess.
1. Create an inventory
You might not think you possess enough things to warrant estate planning, but you might be pleasantly surprised by how much stuff you actually do. A excellent strategy to manage your tangible and intangible assets is to create an inventory.
Intangibles that can be found in an estate include:
- property, such as houses or land.
- vehicles such as motorbikes, cars, or boats.
- Coins, artwork, antiques, and trading cards are examples of collectibles.
- additional personal items.
An estate’s intangible assets could comprise the following:
- certificates of deposit, savings and checking accounts.
- Mutual funds, bonds, and stocks.
- Term life insurance.
- Individual retirement accounts and 401(k) plans offered by employers are examples of retirement plans.
- healthcare savings plans.
- ownership of a company.
List any outstanding liabilities you might have as well. Mortgages, credit cards, and other outstanding debt may be included in this. It will be simpler for an estate executor to notify any creditors in the case of your passing if you have a written list of your unpaid debts.
2. Account for your family’s needs
Consider how to safeguard the assets and your family after your passing after you have an idea of what is in your estate.
- If you don’t already have a will, create one. Even online will creation is possible.
- Make certain you have adequate life insurance. The answer to your next inquiry, “How much life insurance do I need?” will depend on a number of variables, including your marital status and whether your current way of life necessitates two incomes. For people who have dependent children, life insurance is extremely crucial.
- When you create your will, choose a guardian for your children as well as a backup guardian, just in case. By doing this, you might avoid exorbitant family court battles that might deplete the assets in your estate.
3. Establish your directives
Important legal instructions are part of an estate plan that is full.
- A trust may be necessary. With a revocable living trust, you choose a trustee to oversee your assets and manage them for your benefit and the benefit of your beneficiaries.Your chosen trustee will be able to take over if you become ill or incapacitated. The assets of the trust pass to your chosen beneficiaries upon your death, avoiding the probate process, which would otherwise be used to disperse your assets. Another choice is to create an irreversible trust, which the creator cannot alter or revoke.
- A medical care directive, commonly referred to as a living will, outlines your preferences for medical treatment in the event that you are unable to do so for yourself. You can also grant medical power of attorney to a trusted individual, empowering them to make decisions on your behalf in the event that you are unable to. An advance health care directive, which combines these two documents into one, is occasionally used.
- If you become medically incapable of managing your finances, a durable financial power of attorney enables someone else to do so. When you are unable to, your appointed agent, in accordance with the document’s instructions, may act on your behalf in legal and financial matters. This entails accessing and controlling your assets as well as paying your obligations and taxes.
- If the thought of giving everything to someone else worries you, a limited power of attorney may be helpful. This legal document accomplishes what it claims to: It places restrictions on the authority of your designated representative. For instance, you might give the individual the authority to sell a certain stock or sign documents on your behalf at the closing of a home transaction.
- Take caution who you give your power of attorney to. Your financial security and possibly your life could be in their hands, literally. It might be a good idea to designate separate individuals to handle the medical and financial representation, along with a backup for each in case your first pick is unable to act when it counts.
4. Review your beneficiaries
Your wishes may be spelled out in your will and other documents, but they might not be all-inclusive.
- Examine your insurance and retirement savings. Beneficiary designations are typically present in retirement plans and insurance policies, and you should maintain track of them and make any necessary updates. Those beneficiary designations frequently take precedence over anything in a will.
- Be sure the correct individuals receive your stuff. Sometimes people forget who they designated as beneficiaries on long-standing policies or accounts. Your present spouse might not receive any of the policy’s payout after your passing, for instance, if your ex-spouse is still listed as a beneficiary on your life insurance policy.
- No beneficiary sections should be left empty. In that situation, an account’s distribution during probate may be determined by the state’s laws governing property distribution.
- List potential beneficiaries. If your major beneficiary passes away before you do and you forget to change the primary beneficiary designation, these backup beneficiaries will be crucial.
5. Note your state’s estate tax laws
Taxes on estates and inheritances can frequently be reduced through estate planning. Most people, though, won’t pay those taxes.
- Only extremely large estates are liable to estate taxes on a federal level. The federal estate tax is normally only applicable to assets valued at more than $12.06 million in 2022 or $12.92 million in 2023, with rates ranging from 18% to 40%. What if your estate is larger than the federal limits? Consider a grantor retained annuity trust (GRAT), a kind of irrevocable trust that can help your heirs pay less in taxes.
- Estate taxes exist in some states. Estates with values below the federal government’s exemption limit may be subject to estate tax. (Check here to see whether states have an estate tax.)
There are inheritance taxes in some states. This implies that your money may be subject to taxation by the individuals who inherit it. (Read more here about inheritance tax.)
6. Weigh the value of professional help
Depending on your circumstances, you should decide whether to work with an estate tax specialist or an attorney to assist you construct your estate plan.
- An online or packaged will-writing application may be adequate for your needs if your estate is modest and your intentions are straightforward. With the help of an interview procedure regarding your life, wealth, and bequests, these programs often take into account IRS and state-specific laws while guiding you through the will-writing process. You can even make essential updates to your DIY will.
- An estate planning lawyer and potentially a tax advisor should be consulted if you have any questions about the procedure. They can assist you in determining whether your estate planning is on the right track, particularly if you reside in a state that has its own estate or inheritance taxes.
- An estate lawyer and/or tax expert can assist in navigating the occasionally difficult ramifications for a big and complex estate, such as one with particular childcare needs, business concerns, or heirs who are not related to the decedent.
7. Plan to reassess
Life evolves. And your estate plan should too.
- When your circumstances alter, whether for the better or worse, review your estate plan. This can involve getting married or getting divorced, having a kid, losing a loved one, acquiring a new career, or getting fired.
- Even if nothing changes in your situation, periodically review your estate plan. Even while the legislation may be the same, your situation may not be.
- To alter your plan will require some work, but have courage. You’ve already avoided the largest estate planning blunder by needing to revise—not developing a plan at all.